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Revenue Equalization Systems in a Federation with Tax Evasion

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  • Lisa Grazzini
  • Alessandro Petretto

Abstract

We analyze how vertical or horizontal fiscal equalization affects the overprovision of local public goods due to vertical fiscal externality, when there is tax evasion. The overspending incentive of regional governments is examined in the cases of fiscal equalization based on pretax earned income and on reported taxable income. We show that a more efficient level of regional public expenditure is associated with a vertical equalization scheme based on a proxy of earned income taken from national-accounts data.

Suggested Citation

  • Lisa Grazzini & Alessandro Petretto, 2012. "Revenue Equalization Systems in a Federation with Tax Evasion," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(3), pages 303-330, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201209)68:3_303:resiaf_2.0.tx_2-r
    DOI: 10.1628/001522108X653859
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    References listed on IDEAS

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    1. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility and Fiscal Imbalance," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1023-1053, December.
    2. Robin Boadway, 2004. "The Theory and Practice of Equalization," CESifo Economic Studies, CESifo Group, vol. 50(1), pages 211-254.
    3. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
    4. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 631-649, November.
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    Cited by:

    1. Rosella Levaggi & Francesco Menoncin, 2017. "Would less regional income distribution justify the present call for devolution?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 780-799, September.
    2. Alberto Baffa, 2019. "Il nuovo sistema di finanziamento e perequazione per le funzioni non essenziali delle regioni italiane: una simulazione degli effetti redistributivi," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2019(3), pages 7-40.

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    More about this item

    Keywords

    fiscal federalism; equalization; marginal cost of public funds; tax evasion;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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